How PSD2 Changes the Banking Game

Turning disruption into competitive advantage

Michael Leppitsch

May 26, 2016

It's not every day that regulatory change presents an opportunity to change the game on your competitors.

PSD2, the European Commission’s directive on payment services that requires financial institutions to provide third-party access to account information via APIs, can be seen as yet another of the many compliance hurdles that banks have to clear, raising costs even more.

With that mindset, it could certainly be tempting to relegate PSD2 to the compliance officer and treat it as regulatory risk. What a huge mistake.

No "dumb pipes" at Nationwide

As Nationwide chief technology officer Simon Hamilton said during our PSD2 & Open Banking Summit in London last week, it’s time to accept that banks will have less control over how customer account information is accessed.

“This will be game-changing,” Hamilton said. There’s a natural concern that banks will become “the dumb pipes,” he said, but there’s a way to embrace PSD2 as a catalyst for innovation: by creating a compelling digital banking experience, Hamilton said.

From regulatory disruption to new business models

In other industries, disruption on the regulatory front has generated winning patterns at some enterprises.

At the height of electric power deregulation, for example, the most dynamic energy companies held weekly executive scrums with their business development “A Teams,” which were well-funded and tasked with experimenting with different models and pilot programs.

The singular focus was on finding courses of action that would create competitive advantage, while also modeling potential downsides and developing hedging strategies.

In many cases, this approach resulted in entirely new lines of business for such enterprises, while those that stayed with the status quo ended up arguing over shrinking slices of the pie for another decade.

Implementation isn’t transformation

As Javier Santamaria, chairman of the European Payments Council, said during our Open Banking summit, simply implementing an API will not transform a bank. It takes much more.

“It’s attitude … it’s whether you are exploring new businesses and new models; whether you are creating new value for customers; whether you are producing new services to old and new customers,” said Santamaria, who is also a senior vice president at Banco Santander, the largest bank in Europe. “That’s not because you just implemented the API, not just that you complied … it’s a mindset shift that you need to carry out."

During the summit, consultant and author Paul Rohan posited that it’s critical for banks to appoint a permanent team tasked with moving the institution into the API economy, and evangelizing the importance of APIs as a business strategy—not just a new compliance mandate or technology change.

With PSD2 on the near horizon, it’s time for banks to do their own testing, quickly pop up some APIs, run hackathons, and engage with partners, fintechs, and customers to plot and test some business scenarios, to tweak what worked and throw away what didn't.

Someone will find new value and figure out savvy ways to monetize it. It might as well be you.